The Queen v. Froese, 77 DTC 5364, [1977] CTC 526 (FCTD)

Collier, J:—In June 1971 the defendant bought a parcel of land near Abbotsford, BC. In June of the next year he sold a 7-acre portion of the parcel. There was a gain in the amount of $31,097. The Minister of National Revenue included $6,174.12, as income, in the defendant’s income for his 1972 taxation year. That figure was the net gain less a reserve of $24,922.88.

The defendant contended the gain was a capital one. He appealed the assessment to the Tax Review Board. The Board found in his favour. The Department of National Revenue deemed that judgment “unsatisfactory”. This appeal was then taken, by way of trial de novo, to this Court.

I was told the evidence adduced before me was, for all practical purposes, substantially the same as that put before the Tax Review Board. At the conclusion of argument I stated the appeal would be dismissed and written reasons given. Those reasons now follow.

As always in cases of this kind the question is essentially one of fact; each case must depend on its particular facts.” [1]

The defendant was born in Winnipeg in 1927. He lived in the Abbotsford area with his parents from 1946 to 1951. He had married in 1948. He had attended Mennonite College in Winnipeg. From 1952 to 1956 he was in the construction business in Manitoba. He built and sold houses on a speculative basis. During that period he built, as well, one apartment building and one commercial building.

In December of 1956 he and his family moved to San Jose, California. The defendant had arthritic problems. He stayed there until 1970. A few months after moving to California he went into the construction business. From time to time he acquired land in his own name. A company which he controlled did the building. He estimated he built and sold over 100 homes. He also built 12 apartment buildings. Six were immediately sold. The others were kept for income purposes. During that period he bought four fairly substantial pieces of raw land. He subdivided these parcels. In some cases he built on the lots, and then sold. In other cases he merely sold the lots.

In June or July of 1969 he invested money in a BC company called Northlode Exploration Ltd. It had mineral holdings in British Columbia and ranch properties in Nevada and California. It turned out to be a poor investment. A great deal of the defendant’s time for the next three years was spent in the United States trying to salvage the company’s affairs.

In 1969 the defendant bought a small commercial building in Abbotsford. He rented it to Canada Manpower. He bought it for income purposes but for reasons I need not set out decided, in 1971, to sell. The gain realized was not taxed.

In April 1970 he left the United States. He returned to Canada and took up residence in the Abbotsford area. At that time he had four pieces of property in California. Since then, three of those properties have been sold. He reported two of the sales as capital gains and one as income. The Department of National Revenue apparently accepted that position.

Before coming back to Canada he bought a lot in Abbotsford in order to build a home for himself and his family. When he arrived, he bought an old house to live in until the new home was built. He later sold the old house.

In 1970 he and a man called Dick bought some property in Clearbrook. The defendant candidly stated the property was bought with the intention of reselling at a profit. It was turned to account in 1972. He declared the gain as income.

In June of 1971 he bought the parcel of land referred to in the first paragraph of these reasons. It was approximately 9 /2 acres. It was located at the north-west corner of old Yale Road and McMillan Road in the Municipality of Sumas. At that time he had sold the building leased to Canada Manpower. The defendant said he bought the property to build a shopping centre on it and hold it as a source of income. He had been told the municipality had decided to allow some commercial development in the particular area. The municipality had advised him the council felt the property on the north-east corner was more appropriate for a neighbourhood shopping centre. But he was invited to present alternative plans that could be considered. Three thousand homes had already been planned. The defendant thought he could build a reasonably-sized shopping centre which would be supported by the projected homeowners.

The defendant testified he had no other intention in mind when he bought the property other than to retain the whole as a shopping centre for investment and income purposes. He impressed me as a very candid and trustworthy witness. The Tax Review Board member described his as ‘a very credible and straightforward witness”. I agree. I accept the defendant’s testimony as to his intention. I have not overlooked the fact, and have kept in mind, that it is in his interest to make such an assertion. Nevertheless I am satisfied the defendant did not have, as contended by the plaintiff, ‘‘at the time of acquisition, an alternative dominant or secondary intention, to turn the property to account”.

At the time of purchase, the former owner wished to sell the whole parcel or nothing. At that time the defendant had not studied the precise amount of property that might be needed for the shopping centre. Within two or three months after purchase and after some investigation, he realized he had more property than he needed.

He did not prepare plans or sketches or have feasibility studies made. The reason for that was the projected residential development took place at a very much slower pace than anticipated. But he did, in 1971. canvass potential shopping centre tenants such as a supermarket and a hardware store. They were not interested because there was too little development in the area at that time. Even today the development is only 50 to 60% of what was projected back in 1971.

I accept the defendant’s explanation as to why he took no other steps until December of 1976 to prepare the property, or any part of it, for shopping centre purposes. It seems to me his explanation is credible, logical and understandable.

After the purchase of the property, and before the sale of the 7 acres in question, the defendant received several unsolicited offers to purchase. Some were for the whole 9 /2-acre parcel. Others were for the front portion only, approximately 2.2 acres. That portion, which the defendant still owns, is the most attractive and the most valuable. He refused all offers.

In 1972 he became involved with two more large properties. From April through June he purchased, from several owners, four adjoining pieces of property near Sumas Way. His purpose was, and is, to construct motel, restaurant and service station premises on the land assembly, then rent them to operators. The area is well situated. The defendant has assembled 3.5 acres. He intends to acquire, if he can, a further necessary 1.3 acres. He has been unable, to date, to persuade the remaining two owners to sell. His purpose, which I accept, is to hold that property as an investment for income purposes.

In the same year he became interested in a 40-acre property in the vicinity of Langley, BC. His intention was to buy and resell at a profit. He bought for $2,500 an acre. He was unable to obtain a satisfactory offer when he tried to resell. Ultimately he traded the 40 acres for a half interest in a construction supply company of which he is now the manager. He realized a gain of about $30,000 on that transaction. He declared it as income.

When he bought the 40 acres he required financing of about $80,000 from his bank. Taking into account previous indebtedness, he calculated his total commitment to the bank would then have been in the neighbourhood of $135,000 to $140,000. He felt he was over-committing himself. Both he and his bank advisers concluded he should liquidate some of his holdings. The obvious, and only practically available, holding was the 7 acres which he then knew to be excessive for his proposed shopping centre requirements. He listed the 7 acres for sale. The resulting gain is what is in issue here.

That concludes my resume of the evidence.

In my opinion, all the facts are quite consistent with the defendant’s avowed intention when he originally acquired the 9 /2 acres: that it was for investment purposes only.* [2] It was only afterwards he realized he had a good deal more land than was necessary for the type of shopping centre which could be supported by the projected community development. When the projected development did not materialize as rapidly as hoped for, he did not attempt to sell all or any part of the parcel. He turned down offers. It was only when he decided he was becoming over-committed financially that he decided to sell the 7 superfluous acres.

If as contended by the plaintiff, the defendant always had an alternative dominant or secondary intention to turn the property to account, then one must ask the question: why, in 1972, did he not sell the whole parcel? There were apparently many opportunities to do that.

I am quite in agreement with the conclusion reached by the member of the Tax Review Board.

The appeal of the Minister is dismissed. The Minister shall pay to the defendant all his reasonable and proper costs* [3] in connection with this appeal.